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Although longer term weather forecasts continue to moderate, weekly natural gas traders were spared the 20-plus-cent drubbing seen in the futures arena for the week ended Dec. 11. For the week ended Dec. 18 the NGI Weekly Spot Gas Average fell a less bruising 11 cents to $1.71 as a Pacific winter storm did manage to impact the Rockies and the country's midsection and minimize the price declines experienced elsewhere.

Of the actively traded points the greatest gain was seen at the Algonquin Citygate with a rise of 22 cents to avrage $2.04. The biggest loser of well-traded points proved to be the Henry Hub, down 25 cents to average $1.69.

Regionally both California and the Rockies came out unscathed and unchanged at $2.21 and $1.89, respectively and producing regions in Texas and Louisiana proximate to the Henry Hub fared the worst. South Louisiana dropped 23 cents to average $1.65, while South Texas skidded 22 cents to $1.65 and East Texas was off 21 cents to $1.68.

The Midcontinent fell 17 cents to $1.69 and the Midwest shed 16 cents to $1.78, while the Northeast, which still lacked any real winter weather, surprisingly lost just a penny to average $1.45.

January futures were in the red 4 of 5 trading sessions during the week and by Friday January had settled at $1.767, down 22.3 cents for the week. Futures traders saw the bottom drop out as forecasts once again reflected ongoing El Nino conditions and showed above-normal conditions out to the end of the month. Prices reached lows not seen since 2001.

A record low storage draw Thursday helped grease the skids for the ailing January contract as the Energy Information Administration (EIA) reported a storage withdrawal of 34 Bcf for the week ending Dec. 11, catching by surprise traders who thought the drop would be closer to 40 Bcf.

At first the market response was somewhat circumspect, but at the close for the seventh consecutive trading session January had posted a decline Thursday, this time falling 3.5 cents to $1.755, but February added seven-tenths of a cent to $1.873.

The storage withdrawal was so small it entered the record books. Going back to when storage data began to be logged in 1994, the 34 Bcf draw is the smallest withdrawal for the second week of December in 22 years. The prior low withdrawal for the second week of December was 43 Bcf, notched in 1994 and again in 2001.

The draw is even more bearish when you consider that the average of the second week of December's withdrawals between 1994 and 2015 is a 114 Bcf pull.

Commenting on the record thin storage draw and the recent record lows recorded by the January natural gas futures contract, one Midwestern industrial end-user said it appeared to be the new normal. "We're living in a time when records are meant to be broken."

Analysts will often rely heavily on weather-based statistical models to make their estimates of weekly storage withdrawals, but with natural gas aggressively displacing coal from the power generation matrix, those estimates become more difficult. Going into Thursday's report, analyst estimates were in the 40 Bcf withdrawal area. Stephen Smith Energy was looking for a pull of 39 Bcf, and a Reuters poll of 21 traders and analysts showed a range of draws from 28 Bcf to 67 Bcf, with an average 40 Bcf pull expectation. ICAP Energy calculated a 44 Bcf withdrawal. Last year 62 Bcf was withdrawn and the five-year pace was a 120 Bcf pull.

When the number was announced traders weren't quite sure what to do. January futures fell to a low of $1.782, but by 10:45 a.m. EST January was trading at $1.789, down a miserly one-tenth of a cent from Wednesday's settlement.

"We were hearing numbers in the 38 Bcf range, so it's not a crazy number off the mark," said a New York floor trader. "I'm hearing this market could go to $1.50 on the downside, and you have to look at $1.75 and $1.50 support and $2.00 resistance."

Tim Evans of Citi Futures Perspective called the report "clearly bearish" and said "combined with the ongoing forecasts for warmer than normal temperatures in the eastern U.S., we don't see potential for more than a short-term technical bounce."

Evans was expecting a 43 Bcf withdrawal, and going forward he sees "the year-on-five-year average storage surplus climb[ing] from 236 Bcf as of Dec. 4 to 489 Bcf as of Jan. 1. While the growth in natural gas supply is a background factor for the market and we view the price decline as putting pressure on U.S. producers to leave more gas in the ground, the immediate cause has been persistent warmer than normal temperatures, especially in the key population centers of the Midwest and Northeast."

Evans, however, continues to look for a "relief rally" and suggests playing the market from the long side. He recommends entering the market with a buy stop in the February contract at $2.08 with a protective sell stop at $1.78 to limit risk on the trade.

Using the new five-region format inventories now stand at 3,846 Bcf and are 541 Bcf greater than last year and 322 Bcf more than the five-year average. In the East Region 16 Bcf were pulled, and the Midwest Region saw inventories fall by 17 Bcf. Stocks in the Mountain Region and Pacific region were unchanged, and the South Central Region, closely similar to the former Producing Region, shed 1 Bcf.

In Friday's trading buyers and sellers for the most part elected to take a pass on three-day deals for natural gas deliveries over the weekend and including Monday.

Weather forecasts in pivotal population centers were forecast to dip but only down to seasonal averages. The NGI National Spot Gas Average fell 8 cents to $1.70 and broad losses in California, the Rockies, Midcontinent and Midwest were able to outdo double-digit gains in New England.

Futures settled mixed in an uneasy calm that has analysts examining still lower prices as 2015 draws to a close.

Market technicians looking for the slightest hint that the market may be stabilizing if not turning around see a glimmer of hope, albeit short-lived. "The only ray of hope I can find is we might see a little bit of a bear market correction to start off next week, but I wouldn't be holding my breath," Walter Zimmermann of United ICAP told NGI.

"Are there any candidates for major support before $1? The only candidates I could come up with is $1.59. That's a five-wave decline from the Polar Vortex peak of 2014 when natural gas popped to $6.49. That's the lowest price consistent with we are near a bottom and we are going to correct the whole move down from $6.49 before we go down to $1.

"It's a pivotal Elliott Wave target and it is well within reach for next week. If we get a weekly close below $1.59 it tells me we have a good shot at seeing $1 sooner rather than later. Natural gas traded at its all time low of $1.02 in January of 1992."

The overall weather outlook has changed minimally in the big picture, although forecasters hint at variable factors in their forecast that lead them to tweak their demand models. "While the pattern is still clearly warm-dominated, with well below normal demand, we did see a tilt today -- for the first time in a few weeks -- that aimed to add some demand to our forecast," said Commodity Weather Group in its morning outlook.

"Slightly cooler short-term changes combine with more variability in the six-10 day and some slightly cooler changes late in the 11-15 day lead to an estimated demand adjustment today toward the positive side. A possible cool wedge on the East Coast the middle of the next week gives us additional caution, and a stronger cool front around Christmas offers to cool the following weekend a bit more.

"The models are also moving away from strong West Coast troughing by the 11-15 day, which 'eases up on the gas' on Eastern super-warm weather. This is not a significant pattern change, though, as well below normal demand continues to dominate the big picture. No significant blocking is indicated to deliver any sort of bigger cold concerns to the Midwest and East," said Matt Rogers, president of the firm.

Analysts see the ongoing increase in the supply surplus as the driving market factor near term.

"Near-record mild temperature trends that remain broadly based across the eastern two-thirds of the U.S. continue to force the front of the natural gas futures curve downward into 14-year low territory," said Jim Ritterbusch of Ritterbusch and Associates in a Friday morning note to clients.

"Although the upper Midcontinent is seeing some cool temps at the present time, with Canada looking a bit colder, the market appears focused on a renewed warm-up early next week with mild expectations now stretching into the new year in most cases. As a result, the dynamic of storage surplus expansion remains as a formidable bearish force that is keeping potential buyers sidelined in allowing values to draft on down into a price zone that seemed unimaginable a couple of months ago.

"Amidst this mild weather environment, we see additional downside pressures on Henry Hub spot pricing that could easily fall to around the $1.50 area. This will keep the carrying charges in expansionary mode in further emboldening existing speculative shorts who appear to be setting tight for now. So although today's COT [Commitments Of Traders] report will likely be indicating an increase in net non-commercial shorts toward our 'red zone' of two-to-one (shorts over longs), the possibility of a significant short-covering price rally still appears remote for now. With this in mind, we will continue to caution against attempts to pick a bottom to this market."

In physical market exchanges, gas for delivery in New England took a jump higher for weekend and Monday delivery as power prices proved supportive, but in the Mid-Atlantic gas was mixed as Monday power prices retreated. Intercontinental Exchange reported on-peak Monday power at the ISO New England's Massachusetts Hub vaulted $6.36 to $30.61/MWh and power at the PJM Interconnection's western hub fell $6.17 to $28.95/MWh.

Deliveries to the Algonquin Citygate Friday rose a stout 56 cents to average $2.92, and packages at Iroquois, Waddington gained 2 cents to $1.94. Gas on Tenn Zone 6 200L improved by 40 cents to $2.69.

Gas on Texas Eastern M-3, Delivery shed 16 cents to $1.11, but gas destined for New York City rose 6 cents to $1.80.

Near-term temperature forecasts called for cooler temperatures by Saturday, down to seasonal norms, and a return to warm temperatures by Monday. Wunderground forecast Philadelphia's Friday high of 52 degrees would drop to 42 Saturday before bouncing back to 55 by Monday. The seasonal high in Philadelphia is 42. Chicago's Friday high of 31 was seen rising to 33 Saturday and 46 by Monday, 12 degrees above normal.

Rockies quotes weakened. Gas at the Cheyenne Hub fell 3 cents to $1.70, and gas on Kern River changed hands 11 cents lower at $1.87. Gas at Opal lost a dime to $1.88, and packages on Transwestern San Juan plummeted 26 cents to $1.73.

Associate Editor, Markets | Denver, COBill Burson has covered energy markets for Bloomberg, Reuters, McGraw Hill, and more recently NGI where he serves as an Associate Markets Editor. As a former geologist and petroleum industry financial analyst, he is experienced in dealing with a wide range of energy issues and events. His industry experience ranges from price forecasting to managing drilling projects in the Rocky Mountains for Union Pacific, Tesoro, and Louisiana Land and Exploration. Bill has a Geological Engineering Degree from Princeton and an MBA from Tulane University.
bill.burson@naturalgasintel.com

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